Treasury’s double lock on energy investment

Treasury interventions – capping energy budgets and blocking carbon targets – look to be seriously jeopardising investor confidence in our clean energy future. Just when the UK should be gearing up to spend at least £10bn a year over the next decade on new, low carbon energy supplies, the Treasury wont budge on its £3bn annual cap on DECC’s budget – the so-called “levy control framework”. And it opposes DECC’s low carbon target for the Energy Bill, due before Parliament this month. Letters supporting an ambitious target for low carbon energy by 2030 – from energy companies, investors and business organisations – are flying into Whitehall.

As a demonstration of how not to do joined up Government, we’ll probably hear a lot more about the “levy control framework” over the next few weeks. Under the current levy (see DECC table), energy suppliers pass on to consumers the cost of financing investment in renewable energy. The cap was set at £2.6bn this year. It rises to £3.9bn by 2015.

Spending limit: £m

2011/12

2012/13

2013/14

2014/15

Renewables Obligation

1,750

2,156

2,556

3,114

Feed in Tariffs

94

196

328

446

Warm Home Discount

250

275

300

310

Total

2,094

2,627

3,184

3,870

The levy control system is bedevilled by short term thinking. There’s no agreement beyond 2015. In future, the consumers’ levy will underpin some of the new energy investments incentivised by the Energy Bill.

The Treasury-DECC standoff first surface publicly in June 2012, when the then Treasury Minister, Chloe Smith MP, refused to attend an Energy & Climate Change Committee hearing to be questioned about the Energy Bill. The committee chair, Tim Yeo MP, was “perplexed”. Citing evidence from energy suppliers, Yeo wrote to Chloe Smith:

“We have statutory targets under the EU renewables directive and Climate Change Act. We want to keep the lights on. What comes first, them or the levy control framework? …I am not sure that a two- to three-year, politically-driven framework is the right one to manage an industry where we are talking about 20- and 30-year investments.”

Under the Energy Bill, as Tom Burke argues in the ENDS Bulletin (October 2012), the levy will be used to finance a contract to pay nuclear, renewable and fossil fuel generators the difference between what it costs them to produce electricity and the market price. This is the “contract for difference” that lies at the heart of the government’s Energy Bill. As Burke says, “The cash does not pass through the Government’s hands, so it’s not a subsidy. Well, maybe. But it is a tax.”

Yeo’s committee said that by 2020 the Treasury’s cap should rise to £8bn a year, allowing a wide margin for annual variation. Meanwhile, today the British Chambers of Commerce become latest group to call for a diverse energy mix that is not “more dependent on fossil fuels from overseas or on one technology at home.”

Written by Philip Pearson

Philip is a former Senior Policy Officer in the TUC’s Economic & Social Affairs Department, working on issues around climate change, energy and transport.